The recommendations herald growing maturity in the Sustainability-Linked Bond market 

Sustainability-linked bonds (SLBs) have become increasingly popular since the publication of the Sustainability-linked Bond Principles in 2020 [1].  SLBs are debt instruments that are attached to key performance indicators (KPIs). These KPIs are long term climate-focused outcomes that are benchmarked by measurable sustainability performance targets (SPTs). Investors are clamouring for ESG-related products, and high-yield issuers have increasingly looked towards issuing SLBs as a part of their sustainability and financing strategy. With the market continuing to develop, the European Leveraged Finance Association (ELFA) and the International Capital Market Association (ICMA) have published ten practical recommendations for high yield SLBs (the Recommendations)[2].


Recommendation 1 applies to high-yield and investment grade SLBs alike and encourages issuers to set a sustainability strategy, clearly identify ambitious SPTs and align sustainability milestones with the contemplated bond characteristics. The purpose of this is to enhance integrity and transparency, and promote accountability in the issuer's sustainability strategy. 

In the sustainability finance high-yield market, there is quite a high number of unlisted, private companies with disparate disclosure standards, making it difficult for investors to locate information. As such, Recommendation 2 suggests that information regarding the selection of KPIs and SPT levels be communicated to investors in the offering memorandum, investor presentation and the issuer's SLB framework, and Recommendation 3 recommends that the SLB characteristics and metrics are set out clearly in a high-yield SLB Disclosure Table [3] in the offering memorandum, and where feasible, the investor presentation. 

Finally, although smaller, private and international high yield issuers may not have the same general disclosure standards relating to ESG data as that of their publicly listed European counterparts, Recommendation 4 encourages issuers to report broad ESG-related data in line with regulatory standards that apply to the relevant investor target market where possible, so investors have more information to better analyse SPTs.


High-yield bonds tend to have a shorter tenure and redemption schedule than investment grade bonds. In the event of a long-term SPT, Recommendation 5 recommends that interim SPTs representing incremental milestone achievements should occur before the end of the non-call period and redemption schedule of the SLB. The target observation date should be before the call date, and otherwise the call price should assume that the SPT has not been met to ensure materiality of the SLB - this prevents the call period of an SLB from being used to remove a key component of an SLB (being the assessment of the SPT) or to strategically avoid a potential increase in coupon.

Issuers are encouraged by Recommendation 6 to align their sustainability strategy with recognised industry best-practice sustainability goals (e.g. Science Based Targets), and to seek external verification or review in regards to the ambition and alignment of their SPTs. 


Recommendations 7 and 8 encourage issuers to set, and disclose, meaningful coupon and call price variations depending on whether an SPT is achieved, and the rationale for the economic value associated with these incentive mechanisms in the context of their funding needs. It is key that the performance of the issuer against the SPT(s) remains impactful with meaningful coupon and call price variations, whether or not the issuer calls the SLB prior to its maturity. The Recommendations have suggested that one way to ensure that the call price-coupon variation is meaningful would be to capitalise and pay the coupon change as though the SLB had remained outstanding to maturity if it fails to achieve the relevant SPT(s) at the time of redemption – it remains to be seen what structures may develop as the SLB market continues to mature.


Recommendation 9 encourages comprehensive, clear and regular reporting on at least an annual basis, and in any case, for any date or period relevant for assessing the SPT performance, and that such SPT reporting should be a contractual requirement, with the failure to do so being either a trigger event activating the coupon variation or even potentially, an event of default following a negotiated grace period. Finally, Recommendation 10 highlights the importance that any reporting should be clear and easy to find, rather than a one-line item buried in an ancillary report; and it should provide a detailed methodology demonstrating the KPI's progress, with detail on any impact from changes to the business (e.g. M&A).


The ELFA and ICMA Recommendations aims to enhance the integrity of the high-yield SLB market by championing ambitious sustainability targets, transparency and accountability. These enhance communication and the availability of ESG data to investors (which would help inform discussions between issuers, investors and other stakeholders on their sustainability performance and plans) and also ensures that SLBs have "teeth" and meaningful impact in our transition towards a more sustainable economy. The Recommendations also seek to address one drawback which critics highlight as a barrier to utilising SLBs, being the lack of consistency and comparability on KPIs. To alleviate this, the Recommendations have annexed the SLB Disclosure Table for a harmonised reporting format between issuers. It is hoped that the Recommendations would help to propel the continued growth of the SLB market.